The Irascible ProfessorSMIrreverent Commentary on the State of Education in America
Today

by Dr. Mark H. Shapiro

"Finance
is the art of passing currency from hand to hand until it finally disappears."
.... ...Robert W. Sarnoff.

Commentary
of the Day - August 15, 2000: The Incredible Shrinking Endowment!

Eckerd
College in St. Petersburg, Florida has seen it's endowment shrink from
$34 million to $13 million since 1993 with the bulk of the decline occurring
in the last 18 months, according to stories published in the St. Petersburg
Times, the Naples Daily News, and the Chronicle of Higher
Education. Eckerd was founded in 1958 as Florida Presbyterian
College, but changed its name in 1972 following a $10 million donation
by trustee and well-known drugstore magnate Jack Eckerd. The college,
though no longer officially connected to the Presbyterian Church, maintains
a close relationship with the denomination.

Since the termination
of its relationship with the Presbyterian Church the operations of the
college have been supervised by a 52 member board, which - according to
the Chronicle article includes "prominent business executives, millionaires,
men of the cloth, and leaders of national higher-education associations".
Board members include Robert H. Atwell, president emeritus of the American
Council on Education, Theodore J. Marchese, vice president of the American
Association for Higher Education, and David L. Warren, president of
the National Association of Independent
Colleges and Universities. There are two obvious questions to
ask in this situation. The first, what happened to the money?
The second, where were the trustees while this was going on?

The answers to
both questions reveal something about the governance of small colleges
like Eckerd. Peter Armacost served as Eckerd's president from 1977
until his resignation in June of this year. Eckerd's endowment was
small and its financial future was far from secure when Armacost took over.
Armacost instituted several imaginative programs that helped to raise the
visibility of the college and to draw funds to its endowment. Two
of the programs - a Management Development Institute and the Academy of
Senior Professionals - turned out to be highly successful. The first
of these is a highly profitable enterprise that provides courses in leadership,
teamwork, and conflict management to corporate clients. The second
program draws from the large number of retired professionals who live in
the St. Petersburg area. The management institute and similar programs
bring in nearly $3 million in profit each year, while members of the Academy
of Senior Professionals contribute approximately $1 million per year in
gifts.

Armacost was far
less successful in his attempts to develop real estate projects on valuable
waterfront property owned by the college. One project, College Harbor,
was a townhouse development that opened in 1986. The other, College
Landing, was an assisted-care facility that broke ground in 1992.
By 1996 both projects were in bankruptcy, and the college was faced with
the prospect of having to pay off liens against the property that were
incurred by the developer. So far about $5.3 million of the endowment
has been consumed by these two real estate projects, and it is estimated
that another $9 million will be lost on College Landing.

While these real
estate projects were failing, the Board of Trustees allowed Eckerd's chief
financial officer to borrow money from the endowment to pay ongoing college
expenses. Initially, this was intended to smooth out cash flow problems.
However, it appears that several million dollars of endowment money was
drained by this process. It also appears that the chief financial
officer at the time, James Christison, attempted to involve the college
in a highly questionable investment scheme. Although the Board of
Trustees declined to participate in this scheme, Christison persuaded several
college supporters to invest substantial sums of money. Eckerd College
eventually paid close to $600,000 to settle claims growing out of this
activity, and Christison retired in 1997.

Mr. Christison
successor, J. Webster Hull, appears to have been an even less talented
financial manager. He continued the practice of using endowment funds
to cover current expenses. This included the use of $6.4 million
to cover the construction costs of a new dormitory and additional funds
to meet cost overruns for a new Continuing Education Center. By all
accounts Hull's office was a shambles. He was unable to provide financial
reports to the Board of Trustees in a timely fashion, and surprisingly
the Trustees did not press for detailed financial reports until trustee
Blueford H. Putnam took over as chair of the trustees' finance committee.
Putnam took the trouble to look at the endowment portfolio, and discovered
the missing millions.

Sadly, the relationship
between the trustees at Eckerd and the administration was far too cozy.
It appears that many of the 52 members of the Board of Trustees were appointed
because of the likelihood that they would contribute to the college, or
because of the "credibility" that they would lend to the college.
It appears that few were chosen to provide genuine oversight of college
operations, and even though many were successful business people few were
willing to ask the hard questions about college finances that one would
expect from independent trustees. At the very minimum, given the
problems that the college was experiencing with its real estate operations
over the past decade, the trustees should have been demanding independent
audits of the college books.

All college and
university trustees need to take heed of what happened at Eckerd!